UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
Date of Report (Date of earliest event reported): December 1, 2000
Umpqua Holdings Corporation
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
Oregon 000-25597 93 - 1261319
----------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
445 S.E. Main Street, Roseburg, Oregon 97470
------------------------------------- --------
Address of Principal Executive Office Zip Code
Registrant's telephone number including area code: 541-440-3961
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
On December 1, 2000, the registrant completed a previously announced
merger with VRB Bancorp pursuant to an Agreement and Plan of Reorganization
(the "Merger Agreement"), dated August 14, 2000, by and among Umpqua Holdings
Corporation, its wholly owned banking subsidiary South Umpqua Bank, VRB
Bancorp and its wholly owned banking subsidiary, Valley of the Rogue Bank.
Pursuant to the Merger Agreement and a related Plan of Merger, the registrant
acquired all of the outstanding shares of VRB Bancorp in exchange for newly
issued shares of the registrant's common stock. Each outstanding share of VRB
common stock was converted into the right to receive 0.8135 share of the
registrant's common stock, with cash paid in lieu of fractional shares.
Approximately 6,767,978 shares of the registrant's common stock were issued in
the transaction.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
The financial statements of VRB Bancorp called for by this Item 7(a) are
included in this report beginning immediately following the signature page.
(b) Pro Forma Financial Information
The pro forma financial information called for by this Item 7(b) are
included in this report immediately following the financial statements of VRB
Bancorp called for by Item 7(a).
(c) Exhibits.
The following exhibits are being filed herewith and this list shall
constitute the exhibit index:
Exhibit
-------
2 Agreement and Plan of Reorganization, incorporated
by reference to the definitive proxy statement filed
under Schedule 14A by the registrant on October 26, 2000
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UMPQUA HOLDINGS CORPORATION
(Registrant)
Date: December 15, 2000 By: /s/ Daniel A. Sullivan
--------------------------------------
Daniel A. Sullivan
Senior Vice President and Chief
Financial Officer
3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------
2000 1999 1998
------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 17,772,137 $ 17,086,676 $ 14,513,570
Interest-bearing deposits with other banks 9,900,000 1,600,000 3,100,000
Federal funds sold 2,500,000 - 23,000,000
------------- -------------- --------------
Total cash and cash equivalents 30,172,137 18,686,676 40,613,570
------------- -------------- --------------
Held-to-maturity securities:
State and municipal subdivisions 17,059,136 18,010,109 17,454,188
------------- -------------- --------------
Available-for-sale securities:
U.S. Treasuries and agencies 54,662,559 54,755,835 57,070,000
Collateralized mortgage obligations and other investments 106,161 134,146 193,631
------------- -------------- --------------
Total available-for-sale securities 54,768,720 54,889,981 57,263,631
------------- -------------- --------------
Federal Home Loan Bank stock 1,992,500 1,898,800 1,765,220
------------- -------------- --------------
Loans held-for-sale 794,188 1,182,951 -
------------- -------------- --------------
Loans, net of allowance for loan losses and unearned income 222,904,374 196,818,024 175,188,200
Premises and equipment, net of accumulated
depreciation and amortization 8,097,217 7,797,420 6,499,131
Goodwill, net of amortization 8,263,783 8,798,661 9,511,831
Other real estate owned - - 51,161
Accrued interest and other assets 3,726,295 3,421,075 2,870,121
------------- -------------- --------------
Total assets $ 347,778,350 $ 311,503,697 $ 311,217,053
============= ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits $ 84,760,500 $ 74,804,533 $ 72,134,186
Interest-bearing demand deposits 121,567,225 119,569,318 110,900,199
Savings deposits 22,909,317 23,512,119 24,269,197
Time deposits 80,500,571 58,479,936 66,818,719
------------- -------------- --------------
Total deposits 309,737,613 276,365,906 274,122,301
Borrowed funds -
------------- -------------- --------------
Accrued interest and other liabilities 2,455,578 1,528,447 1,859,297
------------- -------------- --------------
Total liabilities 312,193,191 277,894,353 275,981,598
------------- -------------- --------------
Commitments and contingencies (Note 12)
Shareholders' equity
Preferred stock, voting, $5 par value; 5,000,000 shares
authorized and unissued - - -
Preferred stock, nonvoting, $5 par value; 5,000,000
shares authorized and unissued - - -
Common stock, no par value, 30,000,000 shares authorized
with 8,301,361, 8,303,596 and 8,694,286 issued and outstanding
at June 30, 2000, December 31, 1999 and 1998, respectively 18,747,003 18,699,060 21,583,869
Retained earnings 17,991,587 16,428,287 13,590,957
Accumulated other comprehensive (loss) income, net of taxes (1,153,431) (1,518,003) 60,629
------------- -------------- --------------
Total shareholders' equity 35,585,159 33,609,344 35,235,455
------------- -------------- --------------
Total liabilities and shareholders' equity $ 347,778,350 $ 311,503,697 $ 311,217,053
============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30,
----------------------------------------------------------------------------
2000 1999 1999 1998 1997
------------- ------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 14,459,991 $ 12,868,231 $ 17,345,427 $ 19,099,960 $ 11,443,683
Interest on investment securities
held-to-maturity:
State and municipal subdivisions 682,828 696,139 929,551 945,018 944,226
Interest on investment securities
available-for-sale:
U.S. Treasuries and agencies 2,513,693 2,494,418 3,340,584 1,648,543 1,336,882
Collateralized mortgage obligations and
other investments 99,710 106,628 8,721 27,624 78,310
Federal Home Loan Bank stock dividends 133,792 137,720 88,500
Federal funds sold 15,470 525,376 683,822 1,537,913 655,746
Interest on deposits in banks 96,411 190,087 251,678 514,895 407,337
------------- ------------- ----------------------------------------------
Total interest income 17,868,103 16,880,879 22,693,575 23,911,673 14,954,684
------------- ------------- ----------------------------------------------
INTEREST EXPENSE
Interest-bearing demand deposits 2,565,866 2,260,614 3,095,169 3,210,401 2,414,951
Savings deposits 350,765 365,940 486,210 523,341 336,830
Time deposits 2,475,632 2,135,765 2,831,771 3,932,290 1,309,999
Other borrowings 153,253 - - 4,490 -
------------- ------------- ----------------------------------------------
Total interest expense 5,545,516 4,762,319 6,413,150 7,670,522 4,061,780
------------- ------------- ----------------------------------------------
NET INTEREST INCOME 12,322,587 12,118,560 16,280,425 16,241,151 10,892,904
PROVISION FOR LOAN LOSSES - - - - 250,000
------------- ------------- ----------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,322,587 12,118,560 16,280,425 16,241,151 10,642,904
------------- ------------- ----------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 1,097,230 958,448 1,300,921 1,294,878 1,019,786
Other operating income 760,791 541,389 754,731 846,102 650,853
------------- ------------- ----------------------------------------------
Total non-interest income 1,858,021 1,499,837 2,055,652 2,140,980 1,670,639
------------- ------------- ----------------------------------------------
NON-INTEREST EXPENSES
Salaries and benefits $ 4,775,768 $ 4,682,709 $ 6,317,618 $ 5,984,912 $ 4,120,469
Net occupancy 1,114,644 924,943 1,157,013 1,024,860 813,915
Amortization of goodwill 563,634 565,038 713,170 739,616 110,299
Communications 341,388 333,533 452,014 386,461 239,721
Data processing 187,315 254,345 325,376 306,499 181,460
Supplies 187,244 191,676 267,454 289,675 230,255
Advertising 250,686 282,356 293,889 260,454 247,668
Professional fees 118,859 152,364 192,401 266,446 180,658
FDIC insurance premium 41,545 22,956 30,603 47,270 18,201
Merger related expenses 217,786
Other expenses 558,024 374,061 814,906 1,183,255 730,278
------------- ------------- -------------- -------------- --------------
Total non-interest expenses 8,356,893 7,783,981 10,564,444 10,489,448 6,872,924
------------- ------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES 5,823,715 5,834,416 7,771,633 7,892,683 5,440,619
PROVISION FOR INCOME TAXES 2,267,525 2,198,250 2,883,250 2,966,000 1,737,000
------------- ------------- -------------- -------------- --------------
NET INCOME $ 3,556,190 $ 3,636,166 $ 4,888,383 $ 4,926,683 $ 3,703,619
============= ============= ============== ============== ==============
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on securities, net of tax:
Unrealized holding gain (loss) arising during
period (1,578,632) 12,087 (2,964)
Reclassification adjustment for gain included
in net income - - - - (4,283)
------------- ------------- -------------- -------------- --------------
Other comprehensive income (loss) (132,564) (1,052,330) (1,578,632) 12,087 (7,247)
------------- ------------- -------------- -------------- --------------
COMPREHENSIVE INCOME $ 2,325,641 $ 1,376,266 $ 3,309,751 $ 4,938,770 $ 3,696,372
============= ============= ============== ============== ==============
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
Basic $ 0.43 $ 0.42 $ 0.57 $ 0.57 $ 0.48
============= ============= ============== ============== ==============
Diluted $ 0.43 $ 0.42 $ 0.57 $ 0.56 $ 0.48
============= ============= ============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Common Retained Accumulated Total
Common Stock Earnings Other Shareholders'
Shares Comprehensive Equity
Income (Loss)
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 3,574,682 $ 9,480,330 $ 10,652,015 $ 55,789 $ 20,188,134
Stock options exercised
(February to August 1997) 17,475 85,230 - - 85,230
2 for 1 stock split
(September 10, 1997) 3,592,157 - - - -
Stock options exercised
(September to October 1997) 6,430 26,152 - - 26,152
Income tax benefit from stock
options exercised - 86,896 - - 86,896
Cash dividend ($.14 per share,
paid October 31, 1997) - - (1,006,333) - (1,006,333)
Stock offering (November 1997) 1,150,000 8,784,104 - - 8,784,104
Net income and comprehensive loss - - 3,703,619 (7,247) 3,696,372
-------------- --------------- --------------- -------------- --------------
BALANCE, December 31, 1997 8,340,744 18,462,712 13,349,301 48,542 31,860,555
Stock options exercised
(March to September 1998) 19,410 50,128 - - 50,128
Income tax benefit from stock
options exercised - 60,500 - - 60,500
Cash dividend ($.20 per share,
paid October 1, 1998) - - (1,672,031) - (1,672,031)
4% stock dividend (October 1, 1998) 334,132 3,010,529 (3,010,529) - -
Payments for fractional shares
related to stock dividend - - (2,467) - (2,467)
Net income and comprehensive income - - 4,926,683 12,087 4,938,770
-------------- --------------- --------------- -------------- --------------
BALANCE, December 31, 1998 8,694,286 21,583,869 13,590,957 60,629 35,235,455
Stock options exercised March
to December 1999 36,179 219,126 - - 219,126
Cash dividend ($0.12 per share,
paid May 21, 1999 and
October 15, 1999) - - (2,051,053) - (2,051,053)
Stock repurchased (April to
December 1999) (426,869) (3,103,935) - - (3,103,935)
Net income and comprehensive loss - - 4,888,383 (1,578,632) 3,309,751
-------------- --------------- --------------- -------------- --------------
BALANCE, December 31, 1999 8,303,596 18,699,060 16,428,287 (1,518,003) 33,609,344
-------------- --------------- --------------- -------------- --------------
Net income and comprehensive loss 3,556,190 3,556,190
Other Comprehensive Income, net of tax unrealized
gains on securities arising during this period. 364,572 364,572
Stock options exercised 13,837 97,197 - 97,197
Cash dividend ($0.12) per share, declared
March 30, and September 25, 2000 - - (1,992,890) - (1,992,890)
Stock repurchased (8,000) (49,254) - - (49,254)
BALANCE, September 30, 2000 (unaudited) 8,309,433 $ 18,747,003 $ 17,991,587 $ (1,153,431) $ 35,585,159
============== =============== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30 Years Ended December 31,
---------------------------- ---------------------------------------
2000 1999 1999 1998 1997
------------ -------------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,556,190 $ 3,636,166 $ 4,888,383 $ 4,926,683 $ 3,703,619
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 1,160,665 802,639 1,220,546 1,134,242 392,547
Loss (gain) on sales of assets - - 18,423 (18,931) (8,429)
Provision for loan losses - - - - 250,000
FHLB stock dividend (93,700) (99,580) (133,580) (137,720) (88,500)
Deferred taxes - - (167,988) 89,269 22,684
Compensation expense - stock options - - 89,763 93,340 57,312
Change in cash due to changes in certain assets
and liabilities:
Net change in accrued interest and other assets (370,917) (93,398) 324,277 410,555 215,220
Net change in accrued interest and other liabilities (70,001) (400,481) (313,041) (1,292,613) 323,300
------------ -------------- ------------ ----------- ------------
Net cash from operating activities 4,182,237 3,845,346 5,926,783 5,204,825 4,867,753
------------ -------------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the maturity of held-to-maturity
securities 955,000 575,000 575,000 3,425,000 215,000
Purchases of held-to-maturity securities - (1,125,587) (1,125,587) (2,371,411) -
Proceeds from the maturity or sales of
available-for-sale securities 527,043 10,541,579 10,559,844 33,611,023 3,455,408
Purchases of available-for-sale securities (10,500,000) (10,500,000) (64,980,969) (3,000,000)
Net (increase) decrease in loans (25,913,881) (9,423,417) (22,963,084) 31,608,420 (15,888,096)
Cash paid, net of cash acquired from acquisition - - - (1,644,499) -
Sale of credit card portfolio obtained in acquisition - - - 939,583 -
Purchase of premises and equipment (688,830) (1,467,319) (1,795,106) (675,541) (699,013)
Proceeds from the sale of other real estate - - 186,500 420,850 -
Proceeds from the sale of premises and equipment - - 8,585 - 2,600
------------ -------------- ------------ ----------- ------------
Net cash from investing activities (25,120,668) (11,399,744) (25,053,848) 332,456 (15,914,101)
------------ -------------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 33,371,707 6,293,905 2,243,605 (6,930,019) 17,607,889
Net borrowing - - - -
Proceeds from public stock offering, net of 97,197 131,619
expenses - - - - 8,784,104
Cash dividends and fractional share payments (995,758) (1,046,126) (2,051,053) (1,674,498) (1,006,333)
Cash received from exercise of common stock
options 111,554 36,517 88,068
Repurchase of common stock (49,254) (2,413,716) (3,103,935) - -
------------ -------------- ------------ ----------- ------------
Net cash from financing activities 32,423,892 2,965,682 (2,799,829) (8,568,000) 25,473,728
------------ -------------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11,485,461 (4,588,716) (21,926,894) (3,030,719) 14,427,380
CASH AND CASH EQUIVALENTS, beginning of period 18,686,676 40,613,570 40,613,570 43,644,289 29,216,909
------------ -------------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 30,172,137 $ 36,024,854 $ 18,686,676 $ 40,613,570 $ 43,644,289
============ ============== ============ =========== ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION
Cash paid for interest $ 5,462,509 $ 4,843,138 $ 6,486,065 $ 7,464,255 $ 4,048,741
============ ============== ============ =========== ============
Cash paid for taxes $ 2,005,000 $ 2,206,100 $ 2,944,100 $ 2,805,000 $ 1,320,994
============ ============== ============ =========== ============
SCHEDULE OF NONCASH ACTIVITIES
Stock dividends declared $ - $ - $ - $ 3,010,529 $ -
============ ============== ============ =========== ============
Transfer of loan balances to other real estate $ - $ - $ 150,309 $ 453,079 $ -
============ ============== ============ =========== ============
Unrealized gain (loss) on available-for-sale
securities, net of tax $ 364,572 $ (1,106,087) $ (1,578,632) $ 12,087 $ (7,247)
============ ============== ============ =========== ============
Income tax benefit of stock options exercised $ - $ - $ - $ 60,500 $ 86,896
============ ============== ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include the accounts of VRB
Bancorp (VRB), a bank holding company, and its wholly-owned subsidiary, Valley
of the Rogue Bank (the Bank). Substantially all activity of VRB is conducted
through its subsidiary bank and all significant intercompany accounts and
transactions have been eliminated in the preparation of the consolidated
financial statements.
Description of business
The Bank is a state-chartered institution authorized to provide banking
services by the State of Oregon. With its headquarters in Rogue River, Oregon,
it also has branch operations in Josephine and Jackson County, Oregon. The
Bank conducts a general banking business. Its activities include the usual
deposit functions of a commercial bank: commercial, real estate, installment,
and mortgage loans; checking and savings accounts; automated teller machines
(ATM's); collection services; and, safe deposit facilities. Both VRB Bancorp
and Valley of the Rogue Bank are subject to the regulations of certain Federal
and State agencies and undergo periodic examinations by those regulatory
authorities.
Management's estimates and assumption
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Investment securities
The Bank is required to specifically identify under generally accepted
accounting principles its investment securities as "held-to-maturity,"
"available-for-sale," or "trading accounts." Accordingly, management has
determined that all investment securities held at June 30, 2000 and at
December 31, 1999 and 1998, are either "available-for-sale" or
"held-to-maturity" and conform to the following accounting policies:
Securities held-to-maturity
Bonds, notes, and debentures for which the Bank has the intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over the
period to maturity.
Securities available-for-sale
Available-for-sale securities consist of bonds, notes, debentures, and
certain equity securities not classified as held-to-maturity securities.
Securities are generally classified as available-for-sale if the instrument
may be sold in response to such factors as: (1) changes in market interest
rates and related changes in the security's prepayment risk, (2) needs for
liquidity, (3) changes in the availability of and the yield on alternative
instruments, and (4) changes in funding sources and terms. Unrealized holding
gains and losses, net of tax, on available-for-sale securities are reported
as a net amount in a separate component of equity until realized. Fair values
F-5
<PAGE>
for investment securities are based on quoted market prices. Gains and losses
on the sale of available-for-sale securities are determined using the
specific-identification method.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than temporary,
result in write-downs of the individual securities to their fair value. The
related write-downs would be included in earnings as realized losses. Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Loans, net of allowance for loan losses and unearned income
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and unearned income. Interest on loans is calculated by using
the simple-interest method on daily balances of the principal amount
outstanding. The allowance for loan losses is established through a provision
for loan losses charged to expenses. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. Various regulatory agencies, as
an integral part of their examination process, periodically review the Bank's
reserve for loan losses. Such agencies may require the Bank to recognize
additions to the reserve based on their judgment of information available to
them at the time of their examinations.
Loans receivable that will not be repaid in accordance with their contractual
terms are measured using a discounted cash flow methodology or the fair value
of the collateral for certain loans. Accrual of interest is discontinued on
impaired loans when management believes, after considering economic and
business conditions, collection efforts, and collateral position that the
borrower's financial condition is such that collection of interest is
doubtful. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets. Depreciation is based on useful lives of
3 to 25 years on furniture and equipment; 15 to 40 years for buildings and
components; and, 15 to 20 years on leasehold improvements.
Other real estate
Real estate acquired by the Bank in satisfaction of debt is carried at the
lower of cost or estimated net realizable value. When property is acquired,
any excess of the loan balance over its estimated net realizable value is
charged to the allowance for loan losses. Subsequent write-downs to net
realizable value, if any, or any disposition gains or losses are included in
noninterest income and expense.
F-6
<PAGE>
Goodwill
Goodwill represents the costs in excess of net assets acquired arising
principally from the purchase of Colonial Banking Company (see Note 2), and is
being amortized over 15 years.
Income taxes
Deferred income tax assets and liabilities are determined based on the tax
effects of differences between the book and tax bases of the various balance
sheet assets and liabilities. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Statement of cash flows
Cash equivalents are generally all short-term investments with a maturity of
three months or less. Cash and cash equivalents normally include cash on hand,
amounts due from banks, and federal funds sold.
Off-balance-sheet financial instruments
The Bank holds no derivative financial instruments. However, in the ordinary
course of business, the Bank enters into off-balance-sheet financial
instruments consisting of commitments to extend credit as well as commercial
letters of credit and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.
Fair value of financial instruments
The following methods and assumptions were used by the Bank in estimating fair
values of financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and short-term
instruments approximate their fair value.
Held-to-maturity and available-for-sale securities - Fair values for
investment securities, excluding restricted equity securities, are based
on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
Loans receivable - For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four family residential), credit card loans, and other consumer
loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values for commercial real estate and
commercial loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and certificates of
deposit (CDs) approximate their fair values at the reporting date. Fair
F-7
<PAGE>
values for fixed-rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of
other short-term borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
Long-term debt - The fair values of the Bank's long-term debt are
estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet instruments - The Bank's off-balance-sheet instruments
include unfunded commitments to extend credit and standby letters of
credit. The fair value of these instruments is not considered practicable
to estimate because of the lack of quoted market prices and the inability
to estimate fair value without incurring excessive costs.
Advertising
Advertising costs are charged to expense during the year in which they are
incurred. Advertising expenses were $293,889, $260,454, and $247,668 for the
years ended December 31, 1999, 1998, and 1997, respectively.
Stock options
VRB applies Accounting Principles Board Opinion 25 and related interpretations
in accounting for its stock option plans. Accordingly, compensation costs are
recognized as the difference between the exercise price of each option and the
market price of VRB's stock at the date each grant becomes further vested.
Accordingly, compensation costs charted to income were $89,673, $93,340, and
$57,312 in 1999, 1998, and 1997, respectively. Had compensation for VRB's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of Statement of
Financial Accounting Standards No. 123, the Bank's net income would have been
affected as described in Note 14.
Recently issued accounting standards
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that VRB recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment
(b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. SFAS No. 133, as amended by SFAS No. 137, shall be effective for
F-8
<PAGE>
all fiscal quarters of all fiscal years beginning after June 15, 2000.
However, management of VRB believes this accounting standard will have no
effect on the financial condition and results of operation of the Bank.
Other issued but not yet required FASB statements are not currently applicable
to the Bank's operations. Management believes these pronouncements will also
have no material effect upon VRB's financial position or results of operation.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform with current year presentations.
Interim Financial Statements
The unaudited consolidated financial statements for June 30, 1999 and 2000 and
the six month periods then ended have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in compliance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Adjustments to the interim financial statements are of a normal recurring
nature and include all adjustments that, in the opinion of management, are
necessary to the fair presentation of the financial position and operating
results for the interim periods. The operating results for the six months
ended June 30, 2000 and not necessarily indicative of the results that may be
expected for the entire fiscal year ending December 31, 2000 or any other
future interim period. See VRB's Management's Discussion and Analysis for
further interim information.
NOTE 2 -- ACQUISITION OF COLONIAL BANKING COMPANY
VRB Bancorp completed its acquisition of Colonial Banking Company (CBC)
effective January 5, 1998. VRB paid former stockholders of CBC $15.7 million
in cash for the common and preferred stock of CBC. This acquisition was
treated as a purchase for accounting purposes. Accordingly, under generally
accepted accounting principles, the assets and liabilities of CBC have been
recorded on the books of the Bank at their respective fair market values at
the effective date the acquisition was consummated. Goodwill, the excess of
the purchase price over the net fair value of the assets and liabilities
acquired, was recorded at $9.5 million. Amortization of goodwill over a
15-year period will result in a charge to earnings of approximately $635,000
per year.
The following are the fair values of assets acquired and liabilities assumed
as of the January 5, 1998, acquisition date (in thousands):
Investment securities $ 4,797
Federal Home Loan Bank stock 420
Loans, net 92,775
Premises and equipment, net 1,802
Goodwill 9,526
Accrued interest and other assets 1,710
--------
Total assets $111,030
========
Deposits $107,876
Accrued interest and other liabilities 1,510
Cash paid for acquisition, net of cash acquired 1,644
--------
Total liabilities $111,030
========
The financial statements for the year ended December 31, 1998, include the
operations of CBC from January 6, 1998 to December 31, 1998. Actual results of
F-9
<PAGE>
operations for the year ended December 31, 1998, would not have been
materially different had the acquisition occurred on January 1, 1998. The
following information presents unaudited pro forma results of operations for
the year ended December 31, 1997, as though the acquisition had occurred on
January 1, 1997. The pro forma results do not necessarily indicate the actual
result that would have been obtained had the acquisition of CBC actually
occurred on January 1, 1997.
Net interest income before provision for loan loss $ 16,404
Net income $ 3,713
Earnings per common share:
Basic $ 0.51
Diluted $ 0.50
NOTE 3 -- INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
at December 31, 1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
Gains Losses Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
Held-to-maturity securities:
State and municipal subdivisions $ 18,010 $ 137 $ (249) $ 17,898
========== ========== ========== ==========
Available-for-sale securities:
U.S. Treasuries and agencies $ 56,990 $ - $ (2,234) $ 54,756
Collateralized mortgage obligations 132 2 - 134
---------- ---------- ---------- ----------
$ 57,122 $ 2 $ (2,234) $ 54,890
========== ========== ========== ==========
December 31, 1998
Held-to-maturity securities:
State and municipal subdivisions $ 17,454 $ 793 $ - $ 18,247
========== ========== ========== ==========
Available-for-sale securities:
U.S. Treasuries and agencies $ 56,977 $ 177 $ (84) $ 57,070
Collateralized mortgage obligations 195 - (1) 194
---------- ---------- ---------- ----------
$ 57,172 $ 177 $ (85) $ 57,264
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1999, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------
Estimated Estimated
Amortized Cost Market Value Amortized Cost Market Value
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less $ 205 $ 206 $ 2,572 $ 2,549
Due after one year through five years 3,394 3,418 38,050 36,672
Due after five years through ten years 3,089 3,108 15,500 14,756
Due after ten years 11,132 11,166 1,000 913
-------------- ------------- ------------- -------------
$ 18,010 $ 17,898 $ 57,122 $ 54,890
============== ============= ============= =============
</TABLE>
For purposes of the maturity table, collateralized mortgage obligations, which
are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying
collateral. Collateralized mortgage obligations may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
F-10
<PAGE>
At December 31, 1999 and 1998, investment securities with an amortized cost
of $6,185,993 and $8,168,284, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in capital stock of the FHLB. The FHLB
stock is not actively traded but is redeemable by FHLB at its current book
value.
NOTE 4 -- LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio (including loans held-for-sale) consisted of the
following (in thousands):
1999 1998
------------ -------------
Real estate - construction $ 29,034 $ 23,552
Real estate - residential and commercial 134,765 126,675
Commercial 23,940 16,418
Installment 13,946 12,327
Other loans 51 98
------------ -------------
201,736 179,070
------------ -------------
Allowance for loan losses (3,503) (3,539)
Unearned loan fee income (232) (343)
------------ -------------
$ 198,001 $ 175,188
============ =============
The following is an analysis of the changes in the allowance for loan losses
(in thousands):
<TABLE>
<CAPTION>
1999 1998 $ 1,997
------------ ------------- -------------
<S> <C> <C> <C>
Beginning balance $ 3,539 $ 1,780 $ 1,632
Acquired upon CBC acquisition (Note 2) - 1,898 -
Provision for possible loan losses - - 250
Loans charged off (86) (189) (141)
Recoveries 50 50 39
------------ ------------- -------------
Ending balance $ 3,503 $ 3,539 $ 1,780
============ ============= =============
</TABLE>
The Bank's recorded investment in impaired loans was $523,857 and $262,456 at
December 31, 1999 and 1998, respectively. The average recorded investment in
impaired loans approximates their recorded investment at December 31, 1999 and
1998. The total allowance for loan losses related to these loans at December
31, 1999 and 1998, was approximately $70,000 and $42,000, respectively.
Interest income recognized on impaired loans during the years ended December
31, 1999, 1998, and 1997, was not significant. Management estimates that in
1999, approximately $42,600 of interest income was not recognized on impaired
loans on nonaccrual status, compared with approximately $35,300 in 1998 and
$29,600 in 1997.
F-11
<PAGE>
NOTE 5 -- BANK PREMISES AND EQUIPMENT
Bank premises, furniture, and equipment consisted of the following (in
thousands):
1999 1998
------------ -------------
Land $ 2,069 $ 1,613
Buildings 6,001 5,375
Furniture and equipment 4,268 4,136
------------ -------------
12,338 11,124
Less: accumulated depreciation (4,541) (4,625)
------------ -------------
$ 7,797 $ 6,499
============ =============
NOTE 6 -- ACCRUED INTEREST AND OTHER ASSETS
Accrued interest and other assets consisted of the following (in
thousands):
1999 1998
------------ -------------
Accrued interest receivable $ 1,925 $ 1,931
Prepaid expenses 272 234
Deferred taxes 1,099 553
Other assets 125 152
------------ -------------
$ 3,421 $ 2,870
============ =============
NOTE 7 -- TIME DEPOSITS
Time certificates of deposit of $100,000 and over aggregated $8,574,472
and $8,089,537 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities for time deposits is as
follows (in thousands):
2000 $ 52,802
2001 2,459
2002 2,774
2003 222
2004 and thereafter 223
------------
$ 58,480
============
NOTE 8 -- INCOME TAXES
The income tax provision consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 $ 1,997
------------ ------------- -------------
<S> <C> <C> <C>
Currently payable $ 2,665 $ 2,877 $ 1,715
Deferred 168 89 22
------------ ------------- -------------
Provision for income taxes $ 2,833 $ 2,966 $ 1,737
============ ============= =============
</TABLE>
Deferred income taxes represent the tax effect of differences in timing
between financial income and taxable income. Deferred income taxes, according
to the timing differences, which caused them, were as follows (in thousands):
F-12
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Accounting loan loss provision less than
(in excess of) tax provision $ 14 $ 69 $ (58)
Accounting depreciation less than tax
depreciation 42 46 3
Deferred compensation 15 9 (6)
Accounting loan fees in excess of tax
loan fees 178 67 66
Federal Home Loan Bank stock dividends 54 52 28
Cash to accrual adjustment - (72) -
Option compensation expense (36) (72) -
Other differences (99) (10) (11)
------------ ------------- -------------
$ 168 $ 89 $ 22
============ ============= =============
</TABLE>
The net deferred tax benefits included in other assets in the
accompanying consolidated balance sheets include the following components (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserve $ 1,062 $ 1,076
Deferred compensation 64 100
Other 242 86
------------ -------------
Deferred compensation 1,368 1,262
------------ -------------
Deferred tax liabilities:
Accumulated depreciation (193) (151)
Deferred loan fees (543) (365)
Federal Home Loan Bank stock dividends (247) (193)
------------ -------------
(983) (709)
------------ -------------
Net deferred tax asset $ 385 $ 553
============ =============
</TABLE>
The exercise of stock options which have been granted under VRB
Bancorp's stock option plan for directors give rise to compensation which is
includable in the taxable income of the applicable employees and deductible
by the Bank for federal and state income tax purposes. Such compensation
results from increases in the fair market value of VRB Bancorp's common stock
subsequent to the date of grant of the applicable exercised stock options
and, accordingly, in accordance with APB Opinion No. 25, such compensation is
not recognized as an expense for financial accounting purposes and the
related tax benefits are taken directly to common stock. For the years ended
December 31, 1998 and 1997, these transactions resulted in federal and state
tax deductions and benefits, which have increased common stock.
Management believes, based upon the Bank's historical performance, that
net deferred tax assets will be realized in the normal course of operations
and, accordingly, management has not reduced net deferred tax assets by a
valuation allowance.
The tax provision differs from the federal statutory rate of 34% due
principally to tax exemptions for interest received on municipal investments
and nondeductible goodwill expense amortization. The 1997 provision for
income taxes reflects a reduction in the state income tax rate from 6.6% to
3.8%.
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows (in thousands):
F-13
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 2,647 $ 2,684 $ 1,850
State income tax expense, net of
federal income tax benefit 370 344 237
Effect of nontaxable interest income (389) (321) (294)
Non-deductible goodwill 275 219 -
Other (70) 40 (56)
------------ ------------- -------------
$ 2,833 $ 2,966 $ 1,737
============ ============= =============
Effective tax rate 37% 38% 32%
============ ============= =============
</TABLE>
NOTE 9 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and financial guarantees. Those instruments involve elements
of credit and interest-rate risk similar to the amounts recognized in the
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, and financial guarantees written, is represented by
the contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank's experience has
been that a majority of loan commitments are drawn upon by customers. While
most commercial letters of credit are not utilized, a significant portion of
such utilization is on an immediate payment basis. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral varies
but may include cash, accounts receivable, inventory, premises and equipment,
and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third-party. These guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds cash, marketable securities, or real
estate as collateral supporting those commitments for which collateral is
deemed necessary.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1999, 1998, or 1997.
A summary of the notional amounts of the Bank's financial instruments
with off-balance-sheet risk at December 31, 1999 and 1998, follows:
F-14
<PAGE>
1999 1998
------------ -------------
Commitments to extend credit $ 32,106,632 $ 21,165,221
Commercial and standby letters of credit $ 1,113,024 $ 1,090,009
NOTE 10 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying
values of the Bank's financial instruments (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------- ----------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 17,087 $ 17,087 $ 14,514 $ 14,514
Interest-bearing deposits with other banks $ 1,600 $ 1,600 $ 3,100 $ 3,100
Federal funds sold $ -- $ -- $ 23,000 $ 23,000
Securities held-to-maturity $ 18,010 $ 17,898 $ 17,454 $ 18,247
Securities available-for-sale $ 54,890 $ 54,890 $ 57,264 $ 57,264
Federal Home Loan Bank stock $ 1,899 $ 1,899 $ 1,765 $ 1,765
Loans held-for-sale $ 1,183 $ 1,183 $ -- $ --
Loans, net of allowance for loan losses
and unearned income $196,818 $196,208 $175,188 $ 17,233
Accrued interest $ 1,925 $ 1,925 $ 1,931 $ 1,931
Financial liabilities:
Demand and savings deposits $217,886 $217,886 $207,304 $207,304
Time deposits $ 58,480 $ 58,355 $ 66,819 $ 67,196
Accrued interest $ 275 $ 275 $ 348 $ 348
</TABLE>
While estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Bank to have
disposed of such assets or liabilities at December 31, 1999 and 1998, the
estimated fair values would necessarily have been realized at that date, since
market values may differ depending on various circumstances. The estimated
fair values at December 31, 1999 and 1998, should not necessarily be
considered to apply at subsequent dates.
In addition, other assets and liabilities of the Bank that are not
defined as financial instruments are not included in the above disclosures,
such as premises and equipment. Also, nonfinancial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the trained work force, customer goodwill, and similar
items.
NOTE 11 -- CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters
of credit have been granted to customers in the Bank's market area.
Investments in state and municipal securities are not significantly
concentrated within any one region of the United States. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding. Commercial and standby letters of credit were granted primarily
to commercial borrowers as of December 31, 1999. The Bank's loan policy does
not allow the extension of credit to any single borrower or group of related
borrowers in excess of a total of $1,250,000 without approval from the Board
of Directors.
F-15
<PAGE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Litigation - In the ordinary course of business, the Bank becomes
involved in various litigation arising from normal banking activities. In the
opinion of management, the ultimate disposition of these actions will not have
a material adverse effect on the consolidated financial position or results of
operations.
Operating leases - The Bank leases certain branch premises and equipment.
The following is a schedule of future minimum lease payments under operating
leases in effect as of December 31, 1999:
Years ending December 31,
2000 $ 249,453
2001 244,031
2002 241,065
2003 177,844
2004 161,646
Thereafter 361,598
------------
Total minimum payments required $ 1,435,637
============
Total rental expense was $239,785, $226,920, and $94,350 in 1999, 1998,
and 1997, respectively.
Year 2000 - Because of the unprecedented nature of the Year 2000 issue,
its effects, if any, may not be identified until a future date. Management
cannot assure that VRB or the Bank have has identified all Year 2000 issues,
that VRB's or the Bank's remediation efforts has been successful in whole or
in part, or that parties with whom VRB or the Bank does business will not be
significantly impacted by Year 2000 issues.
NOTE 13 -- BORROWING AGREEMENTS
The Bank has federal fund borrowing agreements with Bank of America and
Wells Fargo Bank for $5,000,000 and $3,000,000, respectively. There is no
stated rate of interest on these borrowings. As of December 31, 1999, there
were no borrowings outstanding under these agreements.
The Bank also participates in the Cash Management Advance Program with
the Federal Home Loan Bank of Seattle (FHLB). Under the program, the Bank may
borrow to a maximum of 10% of total assets (approximately $30 million at
December 31, 1999 and 1998) with interest at the FHLB's cash management rate.
There were no borrowings outstanding at December 31, 1999 and 1998.
NOTE 14 -- STOCK OPTION PLANS
The Bank has two stock option plans, which were approved by the
shareholders during 1991 and amended in 1994. The plans provide for an
aggregate of 754,514 shares of the Bank's unissued common stock to be granted
to key employees and nonemployee directors. The 1994 amendment removed the
requirement for a five-year vesting schedule for any future grants from the
Employees' Plan, thus leaving the setting of any vesting schedule to the
discretion of the Board of Directors. The Directors' Plan was amended to
extend the time in which options may be exercised following resignation or
retirement.
F-16
<PAGE>
With the exception of certain options granted to nonemployee directors,
all options granted and outstanding under both the Directors' and Employees'
Plans are noncompensatory and exercisable at purchase prices which approximate
fair value on the date of grant. Because certain options granted to the Bank's
directors were based on purchase prices below the fair value of the stock as
of the grant date, they are considered compensatory transactions and give rise
to the recognition of compensation expense. Accordingly, the Bank has
recognized $89,763, $93,340, and $57,312 as compensation expense relating to
15,695, 16,851, and 18,790 shares of common stock optioned to its directors
during 1999, 1998, and 1997, respectively.
The following summarizes options available and outstanding under both the
Directors' and Employees' Plans as of December 31, 1999, after the effect of
the current year's stock dividend (in thousands with the exception of the
exercise price):
<TABLE>
<CAPTION>
Directors' Plan Employees' Plan Combined
Plans
--------------------------- ------------------------ -----------
Shares Weighted Shares Weighted Shares
Average Average
Option Option
Price Price
------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160
============ ============= =========== =========== ===========
Options exercisable at December 31, 1996 37 $ 1.75 35 $ 1.62 72
============ ============= =========== =========== ===========
Options reserved at December 31, 1996 165 197 362
============ =========== ===========
Options outstanding at December 31, 1996 37 $ 1.75 123 $ 2.78 160
Options granted in 1997 19 2.72 147 8.59 166
Options exercised in 1997 (9) 2.46 (33) 1.93 (42)
Options forfeited - - (5) 3.47 (5)
------------ ----------- -----------
Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279
============ ============= =========== =========== ===========
Options exercisable at December 31, 1997 47 $ 2.01 14 $ 1.96 61
============ ============= =========== =========== ===========
Options reserved at December 31, 1997 146 55 201
============ =========== ===========
Options outstanding at December 31, 1997 47 $ 2.01 232 $ 5.81 279
Options granted in 1998 17 3.67 18 10.62 35
Options exercised in 1998 (13) 1.89 (8) 1.67 (21)
Options forfeited - - (5) 8.14 (5)
------------ ----------- -----------
Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288
============ ============= =========== =========== ===========
Options exercisable at December 31, 1998 51 $ 2.58 40 $ 5.40 91
============ ============= =========== =========== ===========
Options reserved at December 31, 1998 129 42 171
============ =========== ===========
Options outstanding at December 31, 1998 51 $ 2.58 237 $ 6.28 288
Options granted in 1999 16 4.05 5 7.17 21
Options exercised in 1999 (25) 3.09 (11) 3.06 (36)
Options forfeited - - (32) 8.12 (32)
------------ ----------- -----------
Options outstanding at December 31, 1999 42 $ 2.82 199 $ 6.18 241
============ ============= =========== =========== ===========
Options exercisable at December 31, 1999 42 $ 2.82 52 $ 5.54 94
============ ============= =========== =========== ===========
Options reserved at December 31, 1999 113 69 182
============ =========== ===========
</TABLE>
F-17
<PAGE>
Had compensation cost for the Bank's 1999, 1998 and 1997 grants for
stock-based compensation plans been determined consistent with the fair value
provisions of SFAS No. 123, the Bank's net income, and net income per common
share for December 31, 1999, 1998 and 1997 would approximate the pro forma
amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1999
---------------------------
As Pro Forma
Reported
------------ -------------
<S> <C> <C>
Net income $4,888 $4,788
Basic earnings per common and common equivalent share $ 0.57 $ 0.56
Diluted earnings per common and common equivalent share $ 0.57 $ 0.56
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------
As Pro Forma
Reported
------------ -------------
<S> <C> <C>
Net income $4,927 $4,735
Basic earnings per common and common equivalent share $ 0.58 $ 0.56
Diluted earnings per common and common equivalent share $ 0.58 $ 0.56
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------
As Pro Forma
Reported
------------ -------------
<S> <C> <C>
Net income $3,704 $3,497
Basic earnings per common and common equivalent share $ 0.48 $ 0.46
Diluted earnings per common and common equivalent share $ 0.48 $ 0.46
</TABLE>
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: (1)
dividend yields of 3.24% in 1999, 5.75% in 1998, and 1.52% in 1997; (2)
expected volatility of 28.57% in 1999, 18.35% in 1998, and 28.00% in 1997; (3)
risk-free rates of 6.50% in 1999, 4.75% in 1998; and 6.50% in 1997; and, (4)
expected life of one to ten years for all three years.
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
NOTE 15 -- EMPLOYEE BENEFIT PLANS
The Bank has a defined contribution profit sharing plan. All permanent
employees are eligible to participate once they meet the age and length of
employment requirements. Contributions are determined annually by the Board of
Directors and were $337,418, $313,562, and $168,557 in 1999, 1998, and 1997,
respectively, excluding additional amounts set aside for funding through the
Bank's bonus program. Voluntary employee contributions are required to share
in Bank contributions. Employee contributions were $222,313, $226,381, and
$189,640 in 1999, 1998, and 1997, respectively.
The Bank has established a bonus program as part of the compensation
package it provides to employees. At December 31, 1999, the Bank employed
approximately 190 individuals eligible to participate in this program. Under
the program, a bonus pool for nonexecutives is established and funded based on
net profits of the current and immediately preceding year. An executive bonus
program is similarly funded and is based on current year profits with payments
measured on the basis of return on assets. For the years ending December 31,
F-18
<PAGE>
1999, 1998, and 1997, $660,000, $620,000, and $542,400, respectively, was
expensed to fund these programs with their related payroll and benefit costs.
The Bank has also established supplemental retirement agreements with
certain executive officers. The agreements provide for established
post-retirement payments to covered executives for up to ten years after their
retirement. The supplemental programs are self-funded by the Bank through the
setting aside of funds into a bank-controlled deposit account. As of December
31, 1999, a liability for the supplemental retirement plans was recognized and
funded in the amount of $225,736. During 1999, 1998, and 1997, the Bank
recorded distributions of $38,600, $38,600, and $21,000, respectively.
NOTE 16 - EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the year. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to
the exercise of options under the Bank's stock option plans. Comparative
earnings per share data for the years ended December 31, 1998 and 1997, have
been restated to conform with the current year presentation. The following
table illustrates the computations of basic and diluted earnings per share for
the six months ended June 30, 2000 and 1999 (unaudited) and the years ended
December 31, 1999, 1998, and 1997 (dollars in thousands except per share
amounts):
F-19
<PAGE>
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S> <C> <C> <C>
For the six months ended June 30, 2000
(unaudited)
Basic earnings per share -
Income available to common shareholders $ 2,458 $ 8,299 $ 0.30
===========
Effect of dilutive securities
Outstanding common stock options - -
------------- ---------------
Income available to common shareholders
plus assumed conversions $ 2,458 $ 8,299 $ 0.30
============= =============== ===========
For the six months ended June 30, 1999
(unaudited)
Basic earnings per share -
Income available to common shareholders $ 2,429 $ 8,688 $ 0.28
===========
Effect of dilutive securities
Outstanding common stock options - 36
------------- ---------------
Income available to common shareholders
plus assumed conversions $ 2,429 $ 8,724 $ 0.28
============= =============== ===========
Year ended December 31, 1999
Basic earnings per share -
Income available to common shareholders $ 4,888 $ 8,579 $ 0.57
===========
Effect of dilutive securities
Outstanding common stock options - 43
------------- ---------------
Income available to common shareholders
plus assumed conversions $ 4,888 $ 8,622 $ 0.57
============= =============== ===========
Year ended December 31, 1998
Basic earnings per share -
Income available to common shareholders $ 4,927 $ 8,685 $ 0.57
===========
Effect of dilutive securities
Outstanding common stock options - 77
------------- ---------------
Income available to common shareholders
plus assumed conversions $ 4,927 $ 8,762 $ 0.57
============= =============== ===========
Year ended December 31, 1997
Basic earnings per share -
Income available to common shareholders $ 3,704 $ 7,639 $ 0.48
===========
Effect of dilutive securities
Outstanding common stock options - 21
------------- ---------------
Income available to common shareholders
plus assumed conversions $ 3,704 $ 7,660 $ 0.48
============= =============== ===========
</TABLE>
NOTE 17 -- TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are
customers of and have had banking transactions with the Bank in the ordinary
course of business, and the Bank expects to have such transactions in the
future. All loans and commitments to loan included in such transactions were
made in compliance with applicable laws on substantially the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the
management of the Bank, do not involve more than the normal risk of
collectibility or present any other unfavorable features. The amount of loans
outstanding to directors, executive officers, principal stockholders, and
companies with which they are associated was as follows:
F-20
<PAGE>
1999 1998
------------ -------------
Beginning balance $ 1,946,548 $ 1,354,803
Loans made 4,194,000 891,665
Loans paid (584,600) (299,920)
------------ -------------
Ending balance $ 5,555,948 $ 1,946,548
============ =============
NOTE 18 -- REGULATORY MATTERS
VRB Bancorp and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on VRB Bancorp and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, VRB Bancorp and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require VRB Bancorp and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to average assets (as defined). Management believes, as of December
31, 1999, that VRB Bancorp and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1999, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category. VRB Bancorp's capital ratios are not
significantly different from those of the Bank.
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
(in thousands)
Total capital to risk-weighted
assets $ 28,728 12.7% $ 18,080 > 8.0% $ 22,601 > 8.0%
Tier 1 capital to risk-weighted
assets $ 25,895 11.5% $ 9,040 > 4.0% $ 13,560 > 6.0%
Tier 1 capital to average assets $ 25,895 8.3% $ 12,442 > 4.0% $ 15,553 > 5.0%
As of December 31, 1998
(in thousands)
Total capital to risk-weighted
assets $ 28,019 14% $ 16,011 > 8.0% $ 20,013 >10.0%
Tier 1 capital to risk-weighted
assets $ 25,509 12.7% $ 8,034 > 4.0% $ 12,051 > 6.0%
Tier 1 capital to average assets $ 25,509 8.5% $ 12,004 > 4.0% $ 15,005 > 5.0%
</TABLE>
F-21
<PAGE>
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for VRB Bancorp (unconsolidated parent
company only) is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheet 1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 387,667 $ 49,986
Investment in subsidiary 33,239,060 35,126,747
Goodwill 51,675 58,722
------------ ------------
Total assets 33,678,402 35,235,455
============ ============
LIABILITIES
Other liabilities 69,058 -
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 18,699,060 21,583,869
Retained earnings 16,428,287 13,590,957
Accumulated other comprehensive income (loss), net of taxes (1,518,003) 60,629
------------ ------------
Total liabilities and shareholders' equity $ 33,678,402 $ 35,235,455
============ ============
Condensed Statement of Income 1999 1998 1997
------------ ------------ ------------
INCOME
Equity in undistributed (excess distribution of)
earnings of subsidiary bank $ (416,627) $ 4,133,730 $ 2,810,666
Dividends 5,320,000 800,000 900,000
Other income 57 - -
EXPENSES
Goodwill and other administrative expenses (7,047) (7,047) (7,047)
Professional fees (8,000) - -
------------ ------------ ------------
Net income 4,888,383 4,926,683 3,703,619
============ ============ ============
Condensed Statement of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,888,383 $ 4,926,683 $ 3,703,619
Adjustments to reconcile net income to net cash
from operating activities:
Equity in undistributed (excess distribution of)
earnings of subsidiary bank 416,627 (4,133,730) (2,810,666)
Amortization 7,047 7,047 7,047
Increase in liabilities 69,058 - -
------------ ------------ ------------
Net cash from operating activities 5,381,115 800,000 900,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash investment in subsidiary - - (8,000,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public stock offering, net of costs - - 8,784,104
Cash dividends and fractional share payments (2,051,053) (1,674,498) (1,006,333)
Repurchase of common stock (3,103,935) - -
Cash received from exercise of common stock options 111,554 36,517 88,068
------------ ------------ ------------
Net cash from financing activities (5,043,434) (1,637,981) 7,865,839
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337,681 (837,981) 765,839
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 49,986 887,967 122,128
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 387,667 $ 49,986 $ 887,967
============ ============ ============
</TABLE>
NOTE 20 -- STOCK OFFERING
During November 1997, the Bank registered 1,150,000 shares of common
stock for sale to the public at a price of $8.50 per share, for an aggregate
offering price of $9,775,000. All shares were sold, resulting in net proceeds
of $8,784,104, after deducting $990,896 for underwriting discounts and
commissions, legal, accounting and printing fees, and other offering expenses.
Net proceeds to the Bank were used in connection with the acquisition of
F-22
<PAGE>
Colonial Banking Company in early January 1998 (see Note 2). Pending such use,
the net proceeds were invested in short-term, investment-grade securities.
NOTE 21 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1999 Quarter ended
-----------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Results of operations
Interest income $ 5,798 $ 5,755 $ 5,605 $ 5,536
Interest expense 1,650 1,620 1,540 1,603
------------ ------------ ------------- -----------
Net interest income 4,148 4,135 4,065 3,933
Provision for credit losses - - - -
Noninterest income 556 512 479 508
Noninterest expense 2,766 2,702 2,656 2,441
------------ ------------ ------------- -----------
Income before income taxes 1,938 1,945 1,888 2,000
Provision for income taxes 685 738 710 750
------------ ------------ ------------- -----------
Net income $ 1,253 $ 1,207 $ 1,178 $ 1,250
============ ============ ============= ===========
Earnings per common share $ 0.15 $ 0.14 $ 0.14 $ 0.14
============ ============ ============= ===========
Diluted earnings per common share $ 0.15 $ 0.14 $ 0.14 $ 0.14
============ ============ ============= ===========
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter ended
-----------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Results of operations
Interest income $ 5,914 $ 5,886 $ 6,009 $ 6,103
Interest expense 1,733 1,941 1,953 2,043
------------ ------------ ------------- -----------
Net interest income 4,181 3,945 4,056 4,060
Provision for credit losses - - - -
Noninterest income 573 535 522 510
Noninterest expense 2,717 2,599 2,565 2,608
------------ ------------ ------------- -----------
Income before income taxes 2,037 1,881 2,013 1,962
Provision for income taxes 780 701 765 720
------------ ------------ ------------- -----------
Net income $ 1,257 $ 1,180 $ 1,248 $ 1,242
============ ============ ============= ===========
Earnings per common share $ 0.14 $ 0.14 $ 0.14 $ 0.15
============ ============ ============= ===========
Diluted earnings per common share $ 0.14 $ 0.13 $ 0.14 $ 0.15
============ ============ ============= ===========
</TABLE>
F-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders of VRB Bancorp
We have audited the accompanying consolidated balance sheets of VRB Bancorp as
of December 31, 1999 and 1998, and the related statements of income and
comprehensive income, changes in shareholders' equity, and cash flows for the
years ended December 31, 1999, 1998, and 1997. These financial statements are
the responsibility of VRB Bancorp's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of VRB Bancorp as of December 31, 1999 and 1998, and the results of
its operations and cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Moss Adams LLP
Portland, Oregon
January 14, 2000
F-24
<PAGE>
Unaudited Pro Forma Combined Balance Sheet
as of September 30, 2000
<TABLE>
<CAPTION>
Historical
-----------------------
Umpqua Adjustments
Holdings VRB Related to Pro Forma
(in thousands) Corp Bancorp the Merger Combined
--------------------------------------------------
<S> <C> <C> <C>
Cash and balances due from banks $ 52,943 $ 30,172 $ 83,115
Investment securities held to maturity - 17,059 17,059
Investment securities available-for-sale at fair value 71,154 54,768 125,922
Trading accounts assets 1,478 - 1,478
Loans receivable 276,413 227,196 503,609
Less: Allowance for loan losses (4,119) (3,498) (7,617)
Federal Home Loan Bank stock, at cost 2,462 1,993 4,455
Premises and equipment, net 10,287 8,097 (300) (B) 18,084
Intangible assets 3,435 8,264 11,699
Accrued interest receivable 2,720 2,123 4,843
Other assets 2,084 1,604 3,688
--------------------------------------------------
$ 418,857 $347,778 $ (300) $ 766,335
--------------------------------------------------
Demand, non interest-bearing $ 71,198 $ 84,761 $ 155,959
Demand, interest-bearing 149,709 144,476 294,185
Time deposits 134,177 80,500 214,677
--------------------------------------------------
Total deposit liabilities 355,084 309,737 664,821
Borrowed funds 19,735 - 19,735
Accrued interest payable 758 358 1,116
Other liabilities 2,636 2,098 1,320 (B) 6,054
--------------------------------------------------
Total liabilities 378,213 312,193 691,726
Common stock 25,824 18,747 4,163 (C) 48,734
Retained earnings 15,903 17,991 (1,620) (B) 28,111
(4,163) (C)
Unrealized loss on available for sale securities (1,083) (1,153) (2,236)
--------------------------------------------------
Total equity 40,644 35,585 74,609
--------------------------------------------------
$ 418,857 $347,778 $ (300) $ 766,335
--------------------------------------------------
</TABLE>
F-25
<PAGE>
Unaudited Pro Forma Combined Statement of Income
for the Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Historical
-----------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands) Corp Bancorp Combined
------------------------------------------
<S> <C> <C> <C>
Interest and fee income on loans $ 18,206 $ 14,460 $ 32,666
Interest on taxable investment securities 2,653 2,725 5,378
Interest on tax exempt investment securities 1,515 683 2,198
------------------------------------------
Total interest income 22,374 17,868 40,242
Interest on demand deposits 2,262 2,566 4,828
Interest on savings accounts 283 351 634
Interest on time deposits 4,782 2,476 7,258
Interest on borrowed funds 1,168 153 1,321
------------------------------------------
Total interest expense 8,495 5,546 14,041
Provision of loan losses (1,409) - (1,409)
------------------------------------------
Net interest income after provision for loan losses 12,470 12,322 24,792
Non interest income
Service fees 2,424 1,097 3,521
Brokerage commissions and fees 4,519 - 4,519
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 588 761 1,349
------------------------------------------
Total non interest income 7,531 1,858 9,389
Non interest expense
Salaries and benefits 7,643 4,776 12,419
Occupancy and equipment expense 1,752 1,115 2,867
Intangible Amortization 189 564 753
Communications 710 341 1,051
Marketing 566 251 817
Merger related expenses - 218 218
Professional services 1,171 119 1,290
Supplies 357 187 544
Other 1,181 786 1,967
------------------------------------------
Total non interest expense 13,569 8,357 21,926
Income before provision of income taxes 6,432 5,823 12,255
Provision for income taxes 2,322 2,267 4,589
------------------------------------------
Net income $ 4,110 $ 3,556 $ 7,666
==========================================
Earnings per common share
Basic $ 0.54 $ 0.43 $ 0.53
Diluted $ 0.53 $ 0.43 $ 0.53
</TABLE>
F-26
<PAGE>
Unaudited Pro Forma Combined Statement of Income
for the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Historical
------------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands) Corp Bancorp Combined
-----------------------------------------------
<S> <C> <C> <C>
Interest and fee income on loans $ 13,801 $ 12,868 $ 26,669
Interest on taxable investment securities 3,035 3,316 6,351
Interest on tax exempt investment securities 1,111 696 1,807
-----------------------------------------------
Total interest income 17,947 16,880 34,827
Interest on demand deposits 2,178 2,260 4,438
Interest on savings accounts 317 366 683
Interest on time deposits 2,639 2,136 4,775
Interest on borrowed funds 974 - 974
-----------------------------------------------
Total interest expense 6,108 4,762 10,870
Provision of loan losses (881) - (881)
-----------------------------------------------
Net interest income after provision for loan losses 10,958 12,118 23,076
Non interest income
Service fees 2,159 959 3,118
Brokerage commissions and fees 254 - 254
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 478 541 1,019
-----------------------------------------------
Total non interest income 2,891 1,500 4,391
Non interest expense
Salaries and benefits 4,076 4,683 8,759
Occupancy and equipment expense 1,249 925 2,174
Intangible Amortization - 565 565
Communications 541 334 875
Marketing 574 282 856
Professional services 1,066 152 1,218
Supplies 254 192 446
Other 416 651 1,067
-----------------------------------------------
Total non interest expense 8,176 7,784 15,960
Income before provision of income taxes 5,673 5,834 11,507
Provision for income taxes 2,054 2,198 4,252
-----------------------------------------------
Net income $ 3,619 $ 3,636 $ 7,255
===============================================
Earnings per common share
Basic $ 0.47 $ 0.42 $ 0.49
Diluted $ 0.46 $ 0.42 $ 0.49
</TABLE>
F-27
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Income
for the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Historical
------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-----------------------------------------
<S> <C> <C> <C>
Interest and fee income on loans $19,192 $17,345 $36,537
Interest on taxable investment securities 4,577 4,430 9,007
Interest on tax exempt investment securities 911 918 1,829
-----------------------------------------
Total interest income 24,680 22,693 47,373
Interest on demand deposits 2,985 3,095 6,080
Interest on savings accounts 433 486 919
Interest on time deposits 3,660 2,832 6,492
Interest on borrowed funds 1,378 - 1,378
-----------------------------------------
Total interest expense 8,456 6,413 14,869
Provision for loan losses 1,392 - 1,392
-----------------------------------------
Net interest income after provision for loan losses 14,832 16,280 31,112
Non interest income
Service fees 2,973 1,301 4,274
Brokerage commissions and fees 830 - 830
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 621 755 1,376
-----------------------------------------
Total non interest income 4,424 2,056 6,480
Non interest expense
Salaries and benefits 5,731 6,319 12,050
Occupancy and equipment expense 1,807 1,157 2,964
Amortization of goodwill - 713 713
Communications 786 570 1,356
Marketing 942 294 1,236
Professional services 1,343 192 1,535
Supplies 384 267 651
Other 708 1,052 1,760
-----------------------------------------
Total non interest expense 11,701 10,564 22,265
Income before provision of income taxes 7,555 7,772 15,327
Provision for income taxes 2,681 2,884 5,565
-----------------------------------------
Net income $ 4,874 $ 4,888 $ 9,762
=========================================
Earnings per common share
Basic $ 0.64 $ 0.57 $ 0.67
Diluted $ 0.63 $ 0.57 $ 0.66
</TABLE>
F-28
<PAGE>
Unaudited Pro Forma Combined Statement of Income
for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Historical
------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
----------------------------------------
<S> <C> <C> <C>
Interest and fee income on loans $15,737 $19,100 $34,837
Interest on taxable investment securities 4,754 3,866 8,620
Interest on tax exempt investment securities 427 945 1,372
----------------------------------------
Total interest income 20,918 23,911 44,829
Interest on demand deposits 2,792 3,211 6,003
Interest on savings accounts 416 523 939
Interest on time deposits 3,262 3,932 7,194
Interest on borrowed funds 824 4 828
----------------------------------------
Total interest expense 7,294 7,670 14,964
Provision for loan losses 1,025 - 1,025
----------------------------------------
Net interest income after provision for loan losses 12,599 16,241 28,840
Non interest income
Service fees 2,215 1,295 3,510
Brokerage commissions and fees 523 - 523
Gain in sale of mortgaging rights - - -
Loss on sale of investment securities - - -
Other 633 846 1,479
----------------------------------------
Total non interest income 3,371 2,141 5,512
Non interest expense
Salaries and benefits 4,616 5,985 10,601
Occupancy and equipment expense 1,472 1,025 2,497
Amortization of goodwill - 740 740
Communications 630 496 1,126
Marketing 736 260 996
Professional services 1,021 266 1,287
Supplies 366 290 656
Other 637 1,427 2,064
----------------------------------------
Total non interest expense 9,478 10,489 19,967
Income before provision of income taxes 6,492 7,893 14,385
Provision for income taxes 2,382 2,966 5,348
----------------------------------------
Net income $ 4,110 $ 4,927 $ 9,037
========================================
Earnings per common share
Basic $ 0.56 $ 0.57 $ 0.63
Diluted $ 0.55 $ 0.56 $ 0.62
</TABLE>
F-29
<PAGE>
Unaudited Pro Forma Combined Statement of Income
for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Historical
------------------------
Umpqua
Holdings VRB Pro Forma
(in thousands except per share amounts) Corporation Bancorp Combined
-----------------------------------------
<S> <C> <C> <C>
Interest and fee income on loans $13,113 $11,444 $24,557
Interest on taxable investment securities 4,212 2,567 6,779
Interest on tax exempt investment securities 217 944 1,161
-----------------------------------------
Total interest income 17,542 14,955 32,497
Interest on demand deposits 2,442 2,415 4,857
Interest on savings accounts 385 337 722
Interest on time deposits 2,860 1,310 4,170
Interest on borrowed funds 806 - 806
-----------------------------------------
Total interest expense 6,493 4,062 10,555
Provision for loan losses 562 250 812
-----------------------------------------
Net interest income after provision for loan losses 10,487 10,643 21,130
Non interest income
Service fees 1,658 1,020 2,678
Brokerage commissions and fees 425 - 425
Gain in sale of mortgaging rights 583 - 583
Loss on sale of investment securities (75) - (75)
Other 465 651 1,116
-----------------------------------------
Total non interest income 3,056 1,671 4,727
Non interest expense
Salaries and benefits 4,551 4,120 8,671
Occupancy and equipment expense 1,452 814 2,266
Amortization of goodwill - 111 111
Communications 503 322 825
Marketing 698 247 945
Professional services 796 181 977
Supplies 370 230 600
Other 429 848 1,277
-----------------------------------------
Total non interest expense 8,799 6,873 15,672
Income before provision of income taxes 4,744 5,441 10,185
Provision for income taxes 1,700 1,737 3,437
-----------------------------------------
Net income $ 3,044 $ 3,704 $ 6,748
=========================================
Earnings per common share
Basic $ 0.47 $ 0.48 $ 0.53
Diluted $ 0.46 $ 0.48 $ 0.52
</TABLE>
F-30
<PAGE>
Notes to Unaudited Pro Forma Combined Financial Statements:
Note A. Basis of Presentation. The unaudited pro forma financial
information has been prepared under the pooling-of-interests method of
accounting and is based on the historical financial statements of Umpqua and
VRB assuming the Merger had been concluded at the beginning of the periods
indicated. Certain amounts in the historical financial statements of VRB have
been reclassified to conform to Umpqua's historical financial presentation.
The pro forma adjustments represent management's best estimate based on
available information at this time. These adjustments may change as additional
information becomes available.
Note B. Merger and Integration Costs. In connection with the Merger, the
combined company expects to incur pre-tax merger related costs of $2 million
($1.6 million, after tax), $1.0 million of which is expected to occur at the
Effective Date with the remaining $1.0 million to be incurred within the
following six months. The estimated costs include $500,000 in severance
payments, $200,000 in conversion costs (primarily system reconfiguration and
enhancements, customer forms, and other communications), $1.0 million in
professional costs (primarily legal and accounting costs, investment banking
fees and marketing campaigns), and $300,000 in write-off of duplicate
equipment and other capital assets.
These amounts, net of tax, have been reflected in the Unaudited Pro Forma
Combined Balance Sheet as of June 30, 2000. These adjustments are not
reflected in the Unaudited Pro Forma Combined Statements of Income, as they
are not expected to have a continuing impact on Umpqua. These amounts will be
recorded in the financial statements in accordance with generally accepted
accounting principles.
Note C. Capital. In conjunction with the transaction, Umpqua will
exchange 0.8135 shares of Umpqua stock for each share of common stock of VRB.
VRB had 8,301,361 shares outstanding as of June 30, 2000. The common stock has
been adjusted to reflect the stated value of Umpqua stock to be issued, with a
related adjustment to retained earnings. Pro forma combined retained earnings
reflects the adjustments for anticipated merger-related costs as discussed
above.
Note D. Operating Costs Savings and Revenue Enhancements. Umpqua expects
to achieve pre-tax savings of $1.2 million through consolidation of data
processing and back office functions, and reduced professional fees.
Approximately $800,000 of the operating cost savings are expected to be
achieved by the end of 2001, with the remainder achieved in 2002. In addition,
pre-tax revenue enhancement opportunities have been identified amounting to
$400,000, less $100,000 related to possible deposit run-off. No adjustment has
been included in the unaudited pro forma combined financial information for
the anticipated cost savings or revenue enhancements. There can be no
assurance that anticipated operating cost savings or revenue enhancements will
be achieved in the amounts or at the times anticipated.
F-31
